Thanks everyone for the comments! Let me outline the discussion on top for anyone revisiting this card in the future.
If you fail this skill test and would like to choose option #1, then as Zinjanthropus in the comments clarified, the damage is dealt to "an ally" rather than "allies", "you", or "your investigator". And since it specifies one ally, this means (as StyxTBeuford notes) the card is effectively telling you to discard one ally. However, the card does NOT specifically say "discard" even though that's exactly what it wants (although because it is damage, as Hylianpuffball notes, this means you can trigger reaction effects upon death such as Brother Xavier). Do note that you cannot have multiple allies absorb the hit in order to keep them alive either (this is largely impossible anyways). It tripped me up at first because ordinarily, treacheries tell you when they want you to discard (e.g. Crypt Chill). In this case it does not because it sounds scarier, but more importantly, it is more thematically consistent. Someone is getting killed (or severely wounded) from a snake bite. This ally must be able to receive damage though so the incorporeal Guiding Spirit cannot take the blow as SGPrometheus brought up. Django and others point out that in short, when an encounter or other card effect requires you to do something, you can only choose to do it if you are able to meet the request in part. In other words, it has to effect the game state. If it says to lose 3 resources, and you only have 2, you may still choose this option. In our case, when it says to deal 5 damage to an ally, as long as you have an ally with any amount of health, they can take the hit even though the rest of the effect will not amount to much.
I maybe wasn't clear in my original "review" but my intent was to ask the community so that I know to make sure I play the card correctly, and so that others with the same question can now find an answer. As an aside, yes, Agency Backup and Trusted x2 is about the only combination that could have an ally survive this hit, but not for untamed wilds (unless you start with bonus exp somehow). If anyone has dealt 5 damage to an ally and the ally survived, I'd love to hear about it because it sounds epic.
I'm not sure I understand why this card pretends to offer you a choice should you fail.
Dealing 5 damage to an ally means the ally must be able to receive 5 damage (during the assign damage step). If the total incoming damage exceeds the card's maximum health threshold, then the rest needs to be dealt to your investigator (or any other card that can take damage). So my question is, can I choose this first option even if I only have one ally up, say William T. Maleson or Jake Williams, and then stomach the rest on my investigator?
If you can, it's a lot of damage but at least poison can be averted. If you can't, then you'd be forced to choose the second option and suffer poison. But frankly, you'll never be able to choose the first option without having at least 2 allies in play. Why? Because the only allies who offer 4 HP are Agency Backup and Red-Gloved Man, and that still isn't enough to satisfy the requirement. It may not be as big a deal in later scenarios, but if we're talking about Untamed Wilds (which this card is in), then the only investigator who can effectively tank this is Leo Anderson, AFTER he has Mitch Brown AND one or two other allies in play. There is Trusted but it won't be enough. Mateo could soak it in theory since he can spend his bonus EXP on Charisma and two Summoned Hounds, but sheesh. I do feel like the severity for avoiding poison should have some bite, but this is impossible at lvl 0 for anyone but Leo (beyond protecting himself, he can sort of protect someone else with Tetsuo Mori but he didn't release until well after FA) and Mateo (again, only with hounds who did not release until much later). You can buff yourself with some armor, but most lvl 0 options are too minimal to help much.
In short, this card is scary.